TPR guidance for DB Trustees with distressed sponsors

On 12th November, The Pensions Regulator issued guidance for Trustees of all Defined Benefit schemes aimed at highlighting how to spot signs of corporate distress. The guidance goes on to offer practical advice on the action Trustees should take to protect the pension scheme if the signs materialise.

The full guidance is available here. In this article we distil some of the key themes.

Business as usual monitoring

An Integrated Risk Management (IRM) framework is key to spotting problems early on. Trustees should adopt best practice governance approaches during times of steady state, before the sponsor has shown any signs of distress. This should include (but is not limited to):

  • Understanding the employer’s legal obligations to the scheme, including in the event of insolvency.
  • Reviewing scheme governance, including trustee skills and experience and conflicts on the trustee board. In the event of a distressed sponsor, any existing conflicts will become even more challenging.
  • Ensuring risk management processes are in place, including workable mitigants to key risks (risk register, contingency plans etc).
  • Ongoing monitoring of the employer covenant. Trustees should engage with management regularly and should review and challenge all financial information. Professional reviews of the covenant will often identify issues that might not otherwise be obvious.

Spotting a sponsor in financial distress

Trustees adopting best practice risk management and monitoring will be well positioned to identify early signs of a sponsor in financial distress. As we navigate through the muddy waters of the current economic situation, Trustees should be ready to take the following steps if they notice signs of distress:

  • Increase the frequency and extent of covenant monitoring – the level of monitoring should be proportionate to the heightened risk, and Trustees should consider taking additional professional advice. Do not wait for a covenant downgrade – start looking as soon as possible at shorter term financial information.
  • Review investment strategy – investment risk can become more acute when there are concerns about the financial stability of the sponsor. Review the investment strategy and think about whether the acceptable level of investment risk has changed. Should interest rate/inflation hedging be increased? Can you make investment changes quickly if you need to react to a fast-changing situation?
  • Understand other stakeholders who might be creditors to the sponsor and the financing arrangements that are in place. These creditors may look for security against any existing debt which could erode the money available to the pension scheme.
  • Keep communication channels open with the sponsor. A sponsor in distress may make requests to ease certain obligations to the pension scheme, for example deferral of deficit repair contributions, or to release security over an asset. Consider any requests very carefully in the context of the impact insolvency would have on the scheme.
  • Keep the members in mind. Your employer’s financial position may be in the public domain and making sure members understand the steps you are taking can relieve some of the concerns they may have. Also stay alert to scams and transfer activity. Concerned members may open themselves up to the risk of scams or consider taking transfer values which might not be in their best interests. Look out for an increase in the number of CETV requests, particularly if they are coming from the same advisers.

Facing the real prospect of insolvency

If insolvency is looking like the outcome, taking professional advice from specialist restructuring advisers is very important. Trustees must make sure all options to protect the members’ best interests have been considered.

When sponsor’s face difficult times and uncertainty over the future of their business, there will be competing priorities and limited resource available. As such, it is important that Trustees remain open with the sponsor and seek to understand what information is already being produced by management; for example to review cash-flow for trading and reporting purposes. This will allow Trustees to align information requests where possible and minimise additional demands on management. Agreeing an information sharing approach early in the process can be helpful and non-disclosure agreements can also be useful.

Trustees should already be familiar with the PPF’s contingency planning guidance, available here, and at this stage should engage with the PPF about the steps to take to prepare the scheme for PPF assessment.

These steps are:

  • Ensure a complete set of governance documents is held
  • Putting in place contingency plans for payroll and banking independent of the employer. Ensure there is access to payroll information and that sufficient funds are available. You may consider setting up a separate account and holding an appropriate amount of payroll funds if insolvency is imminent and pensioner payroll is run in-house.
  • Make sure you understand which employers are attached to the scheme and which members belong to which employers
  • Make sure plan documents and member data are held elsewhere from company premises – access to an employer’s site to collect records can be difficult after an insolvency.
  • If the sponsor has given the scheme an asset or charge which is contingent on their failure, make sure you have the full details of the triggering events and details of the assets and charges which have become available.

Bumpy seas ahead, make sure your governance is ship shape

The world faces a difficult time ahead, many Trustees will find themselves faced with sponsors in financial distress. The key takeaway from TPR’s guidance is to have a sound governance framework in place now. Ongoing monitoring of the employer covenant has never been more important. A robust Integrated Risk Management framework will help Trustees identify the warning signs and put in place mitigants and triggers for action. Dealing with sponsor insolvency is never going to be easy, but preparation, early identification of issues and action will most certainly improve the outcome.

If you would like to discuss your current risk management framework to understand whether it is fit for purpose and stands up against the Pension Regulator’s best practice guidance, Tina would be pleased to talk to you. Contact Tina on 020 8213 5890.

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